GST rate cuts: Middle class focus, sanitary pads exempted

The Council announced quarterly return-filing and monthly tax payments for businesses with annual turnover of up to Rs 5 crore as against the current threshold of Rs 1.5 crore, a move that is expected to benefit 93 per cent of registered GST taxpayers.

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Union Finance Minister Piyush Goyal at the press conference after the GST Council meeting on Saturday. (Source: Twitter/@PiyushGoyal)

The Goods and Services Tax (GST) Council in its 28th meeting Saturday approved rate reductions for 88 consumer-centric items such as cosmetics, refrigerators, washing machines, and small screen televisions, and cleared the widely demanded exemption on sanitary napkins.

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The tax was also cut to zero for marble and stone idols, rakhis, and sal leaves. The Council announced quarterly return-filing and monthly tax payments for businesses with annual turnover of up to Rs 5 crore as against the current threshold of Rs 1.5 crore, a move that is expected to benefit 93 per cent of registered GST taxpayers.

“Today’s decisions of the GST Council were guided by simplification, rationalisation… Every state wanted that the rates on these items be lowered for benefit of middle-income households… It has also been decided that the GST Council will rise above revenue consideration and focus more on job creation and economic growth,” Finance Minister Piyush Goyal said after chairing the GST Council meeting, his first after taking charge of this portfolio.

Fast-moving consumer goods, which were badly hit after demonetisation, could gain from the cut in rates, which could have an impact ahead of Assembly elections in three heartland states and the general election subsequently. The good monsoon has inspired forecasts of a steady pick-up in rural and urban demand, and the GST rate cuts could catalyse a feelgood sentiment ahead of the festival season.

Senior government officials said the GST rate reductions/clarifications, which will come into effect from July 27, are estimated to result in a revenue loss of around Rs 8,000-10,000 crore, with cuts in the peak 28% slab alone costing the exchequer about Rs 6,000 crore.

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Goyal, however, said that the revenue impact would be “marginal” when compared with the expected increase in compliance as a result of the lower GST rates. This is the fifth round of rate rationalisation undertaken by the GST Council since the fitment of items in the various GST slabs.

Kerala Finance Minister Thomas Isaac termed the decisions “undemocratic”, and said if revenue buoyancy had been the basis for rate cuts, it would have been done for necessities. “It is most unfortunate that GST Council without circulating in the agenda notes should decide to reduce the tax on 18 consumer durables like TV, fridge etc from 28 per cent to 18 per cent disregarding consequences to revenue and equity. Undemocratic and non egalitarian,” Isaac posted on Twitter.

“If anyone considered GST revenue buoyant enough to argue for a reduction in rates they should have reduced rates of the necessities. Maybe even made them tax free. But reducing the taxes for durables from GST 30-40 per cent to 18 per cent only betrays class bias of proponents,” Issac, who did not attend Saturday’s meeting, said.

Items for which the GST rate has been cut from 28% to 18% include vacuum cleaners, domestic electrical appliances such as water heaters, hair shavers/dryers, paints and varnishes, water coolers, scents, perfumes, cosmetics and lithium ion batteries, which are used to charge electric vehicles.

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GST rate for fuel cell vehicles has been reduced from 28 per cent to 12 per cent along with removal of compensation cess. Clarifications have also been issued for certain services including cut in GST rate from 18% to 5% on supply of e-books for which print version exists.

GST on accommodation services of hotels will now be on transaction value, instead of declared value. GST at the rate of 28% is levied if the hotel room tariff exceeds Rs 7,500. For Rs 2,500 to below Rs 7,500, GST is levied at 18%, and between Rs 1,000 and below Rs 2,500, at 12%.

Footwear with retail sale price of up to Rs 1,000 a pair will attract a GST levy of 5%; those costing above Rs 1,000 will continue to attract 18%. At present, 5% GST is levied on footwear up to Rs 500, and 18% for a costlier pair.

The Council also cut the GST rate on ethanol for sale to oil marketing companies for blending with fuel to 5% from 18%. The ministerial panel on sugar cess and ethanol had recommended that it be cut to 12%; the Food Ministry had wanted 5%.

Tax experts welcomed the rate cuts and simplification of the returns-filing process, but pointed out that the exemption for sanitary napkins may not lead to lower prices as manufacturers won’t be able to claim input tax credit. When asked, Goyal said calculations showed that input tax credit on sanitary napkins was about 3-4 per cent, and the government would ensure a lower price for the end product.

In July 2017, the government had defended the decision to not lower the GST rate of 12% on sanitary napkins citing the high tax rates of 18% and 12% on the inputs. The government release had also said that “reducing the GST rate on sanitary napkins to nil will… result in complete denial of ITC to domestic manufacturers of sanitary napkins and zero rating imports. This will make domestically manufactured sanitary napkins at a huge disadvantage vis-à-vis imports, which will be zero rated.”

The Council Saturday also approved amendments to GST-related laws that include raising the turnover threshold for composition dealers to Rs 1.5 crore from Rs 1 crore, along with making them eligible to take the benefit if they supply services (other than restaurant services) for up to a value not exceeding 10% of turnover in the preceding financial year, or Rs 5 lakh, whichever is higher.

Reverse charge mechanism, which was already on hold until September 30 this year, has been deferred to September 30, 2019. The Council also discussed the report of the committee on creating ecosystem for seamless road transport connectivity, as per which it has been decided to link RFID tags with the GST Network.

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The next meeting of the Council will be held on August 4, in which issues relating to the MSME sector will be discussed, along with ways to incentivise digital transactions via RuPay cards and the BHIM app. Businesses will get a last chance until August 31 to migrate to the GST regime, and late fee would be waived, Goyal said.